| VNS TECHNOLOGY WATCH: [Mike Taylor, VNS Correspondent]
===================== [Littleton, MA, USA ]
WHY DELL IS A SURVIVOR
{Forbes October 12th 1992}
Dell more than doubled its revenues in its Aug. 2 quarter from the
equivalent period last year, closing at close to $2 billion.
Far from ignoring Dell, its competitors are paying it the ultimate form
of flattery by adopting Dell's direct-to-consumer marketing, bypassing
retailers. In the face of this stepped-up competition, Dell's (800)
lines are ringing off the hooks. Calls to Dell's order line have swollen
by about 40% since a June announcement that Dell was introducing an even
cheaper line of computers.
Dell's factory is running overtime, cranking out nearly 3,000 machines
a day to keep up with orders.
Dell, however, is going to have to work a little harder for its money.
Its after tax net margin dropped from 6% in the fiscal year that ended
last February to a shade under 5% for the most recent quarter, with
revenues continuing to grow faster than net profit.
Dell's selling and administrative expenses eat up just 14 cents of its
sales dollar, against 24 cents at Apple and 30 cents at IBM. Even after
its massive layoffs of last year, Compaq's marketing overhead costs are
still taking 20 cents out of the sales dollar.
Economies of scale work in favor of the Dell distribution system. To
the extent that its sells directly to consumers rather than to
retailers, Dell has merely to add additional telephone sales people in
Austin as demand increases. That's how Dell took selling and overhead
that were 20% of sales last year down to 14% in the last quarter.
Most people have assumed that Dell sold on price alone. It did in the
beginning, but no longer. Those who attributed Dell's success to
price-cutting have missed an important point. Although it sells almost
entirely by telephone, Dell has managed to maintain a level of customer
satisfaction at least equal to that of competitors who sell through
stores. "We're not the low cost supplier," Michael Dell says. "Compaq
and IBM are assuming that price is the problem. The problem is that the
dealer channel has fundamentally failed at servicing customers."
It helps to understand Dell if you realize that Michael Dell is not so
much a computer entrepreneur as he is a marketing pioneer. His
forerunners are not Steve Jobs and Bill Gates but Ray Kroc and Charles
Schwab.
Dell took the fears and uncertainties out of mail-order computers. Dell
has astutely positioned his company at a middle point on the
cost-and-quality curve.
By the mid-1980s Michael Dell realized that while selling on price
might be a good way of breaking into a market, it was no way to build a
future. Someone else could cut prices a percentage point lower. Dell
needed a different edge - reliability. So he offered such amentities as
unlimited calls to a toll-free technical support line, a 30 day
moneyback guarantee and next-day, on-site service through independent
contractors, free for the first year of ownership.
Compaq was the first to hit it big with first-class IBM clones. But
soon others were putting together clones that would match the IBM PC's
performance, and suddenly there was extreme ease of entry into what had
formerly been a highly technological business. Dell correctly saw the
only way to get an edge in what was fast becoming a commodity business
was through marketing innovations.
Most retailers thought customers would pay a substantial retail markup
in return for being able to go to a store and feel and touch a machine.
Some did and still do. But fewer of them than the establishment
expected, especially not when a lot of the buyers are old-time users
coming back for their second or third machine.
The retailers were stunned when they saw how quickly the Texas upstart
could deliver customized products - in substantially less time than it
would take them to place the order and wait for the manufacturer to ship
it.
Suddenly, everyone realized what he had wasn't just a product, it was a
process.
While IBM, DEC and the others copy an outfit that they once considered
little more than a nuisance, Dell is pushing its telemarketing strategy
a step further. This fall Dell should start sending out DellWare, a
catalog that will offer PC games, software packages like Lotus 1-2-3 and
computer peripherals like modems, printers and disk drives. Dell hopes
to become the mail-order equivalent of the computer superstore and is in
the process of signing up scores of suppliers. "We intend to put the
reseller out of business," Michael Dell says.
More important, as Dell deeps potential customers out of computer
stores altogether, the catalog will marry them more to Dell. Already
Apple Computer has announced it will be starting a similar catalog.
The Dell factory has changed somewhat since the days when assembly was
done by three men, each sitting at a 6-foot-long table. Today in the
Austin factory an order for a half dozen machines mingles with one for
200 traveling down the assembly lines. But it remains virtually a
screwdriver operation, with little automation and an almost job-shop
approach to manufacturing. This both keeps capital costs low and permits
great flexibility. The disk drives might be on the top or the bottom of
the base or be absent altogether, if that's what the customer wants.
Because it buys most of its components, Dell supports its near $2
billion in sales revenues with just $55 million in land, property, plant
and equipment. That's about $33 of sales for every dollar of fixed
assets. The comparable figure for IBM is $2. Even WalMart gets only $7
of retail revenue for every dollar of fixed assets. Dell uses its
capital chiefly to finance inventories, which it currently turns over at
a rate of more than eight times a year. Return on equity like that of
IBM in its heyday - an annualized 29% in Dell's latest Quarter.
{contributed by Alan Maltzman}
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<><><><><><><><> VNS Edition : 2728 Thursday 17-Dec-1992 <><><><><><><><>
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